Public Finance Alert | December.05.2017
Maintaining the existing authority under the Code for private activity bonds (PABs) is vital to continuing public and private investments in infrastructure that support the economy and essential public services. Such investments are financed by issuers across the state, including the Oregon Facilities Authority, Oregon Housing & Community Services and local housing authorities and hospital facilities authorities, among other issuers.
Why Do PABs Exist? PABs largely exist to enable tax-exempt financing of assets often thought of as part of the public infrastructure, but subject to private use, even if the “private user” is merely a qualified 501(c)(3) organization. For example:
What Regulations Govern PABs? The Code and regulations are strict in defining what constitutes a “private activity bond” and include many public projects where paid private use, including use by non-profit organizations, may be sufficient to categorize these projects as private use. Current federal income tax laws and regulations include extensive restrictions on the use of tax-exempt bonds for private business concerns, including a cap on the amount of bonds that may be issued in a single calendar year.
Who Benefits? PABs are an essential public/private partnership, providing a critical financing tool to support capital investment in infrastructure for qualified 501(c)(3) bonds for non-profit hospitals, universities and charter schools, senior living/continuing care retirement facilities, single-family first time homebuyer mortgage bonds, low-income multifamily housing bonds, bonds for exempt facilities such as airports, seaports and solid waste infrastructure projects, bonds for state-run student loan programs, bonds used in public-private partnerships to finance infrastructure including roads and water and sewer facilities, and more.
What Types of Projects? Key infrastructure and public services would be undermined by eliminating or further limiting PAB authority. Both large and small institutions would be affected including, small, non-profit borrowers that have been able to finance essential capital projects because of the ability to access favorable financing by using PABs. Examples in Oregon include:
Compounding the Affordable Housing Crisis. If the provisions of H.R. 1 (the “House Bill”) are enacted, dozens of affordable housing projects (both under construction and in development) throughout the State of Oregon will fail, compounding the statewide housing crisis and reversing the collaborative work of the public and private sectors to accelerate the production of crucial housing units.
The provisions of the House Bill that eliminate PABs will prevent the financing of most low-income, affordable housing projects. While the House Bill purports to preserve the LIHTC, it keeps in place only the 9% LIHTC program and eliminates the 4% LIHTC program which operates in conjunction with PABs to provide essential tools for private investment in affordable housing. The LIHTC and private activity bond programs are long-established and proven financing tools that are now more essential than ever to address the affordable housing crisis in Oregon and many other states across the country.In summary, a loss of the tax exemption on important categories of municipal bonds would increase borrowing costs and result in an increase in local taxes, fees, low-income housing rents and the cost of healthcare and housing for seniors, among other costs, to cover the increased cost of capital. These higher costs will also result in a reduction in the amount of investment in infrastructure and other critical capital projects that would be undertaken by state and local governments and will preclude many capital projects from being undertaken at all.